New Delhi: The Supreme Court Friday quashed Jindal South West (JSW) Steel’s Rs 19,700 crore insolvency resolution plan for Bhushan Power and Steel Limited (BPSL), citing the delayed submission and belated implementation of the resolution plan, suppression of crucial facts, and the failure of the Resolution Professional (RP) and Committee of Creditors (CoC) to discharge their duties under the Insolvency and Bankruptcy Code (IBC) with due diligence.
The over 100-page judgment authored by Justices Bela M. Trivedi and S.C. Sharma included an in-depth examination of the entire insolvency process that commenced in 2017, and highlighted “flagrant violations” committed by JSW—the successful resolution applicant (SRA). The top court also condemned JSW for making a dishonest and fraudulent attempt to succeed as the SRA.
Given the seriousness of the contraventions, the court rejected JSW’s plea to consider that it had implemented the resolution plan over time, even though it was not in accordance with the timeline stipulated in the IBC.
Rejecting the company’s request not to overturn the National Company Appellate Tribunal’s (NCLAT) order since it had complied with the resolution plan, Justices Trivedi and Sharma remarked: “A situation of fait accompli cannot be permitted to be created in the court to frustrate the proceedings, more particularly when the corporate insolvency resolution (CIR) proceedings had ex facie stood vitiated on account of non-compliance of the mandatory provisions of law and on account of the misuse of the process of law by the parties.”
Time is a crucial factor in the scheme under the IBC. However, in the present case, the mala fide and dishonest intention on the part of JSW undermined the IBC’s main objective of completing the entire resolution process in a time-bound manner.
The top court was dealing with a batch of petitions that challenged the National Company Law Appellate Tribunal’s (NCLAT) February 2020 decision to declare JSW as the successful applicant in connection with BPSL’s insolvency proceedings.
NCLAT’s order had come on JSW’s appeal questioning the National Company Law Tribunal’s (NCLT) order that imposed conditions while approving the company as a successful applicant.
With the Friday judgment, the debt-laden steelmaker, BPSL, will undergo liquidation.
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The timeline
Insolvency proceedings against BPSL were initiated following a Reserve Bank of India (RBI) circular issued on 13 June, 2017 that had identified 12 major accounts for resolution. These companies together were infamously known as the “dirty dozen” and, according to the assessment, accounted for the country’s 25 percent of non-performing assets.
The CIRP proceedings against BPSL were triggered at the instance of Punjab National Bank. Admitted on 26 July, 2017, the interim resolution professional (IRP) invited claims from all stakeholders two days later.
JSW had applied as a prospective resolution applicant in August 2018. Two other companies—Tata Steel and Liberty House—had also submitted their respective resolution plans.
On 14 February, 2019, the IRP filed JSW’s resolution plan, duly approved by the Committee of Creditors (CoC), before the NCLT.
Pending these proceedings, the Central Bureau of Investigation on 5 April, 2019, registered an FIR against BPSL. It was followed by the Enforcement Directorate’s case under the Prevention of Money Laundering Act (PMLA).
The NCLT approved the resolution plan on 5 September, 2019, and added some conditions to it. JSW, however, appealed before the NCLAT. Several operational creditors, the ex-promoters of BPSL, and the State of Odisha, to whom BPSL owed dues, also approached the NCLAT against the NCLT’s move to accept JSW’s resolution plan.
Meanwhile, the ED issued an order to provisionally attach BPSL’s properties under the PMLA, which the NCLAT stayed while hearing JSW’s appeal.
In February 2020, the NCLAT approved the resolution plan, while modifying the NCLT’s conditions. It ordered a one-time settlement of pending tax liabilities, which BPSL owed to government agencies, whereas the NCLT had asked JSW to move the competent authorities who were told to decide on its application in accordance with the law. Appeals filed by those opposing the resolution plan were dismissed.
The NCLAT order was questioned before the SC by various creditors. And, while their appeals were pending, there was no stay on the operation of the resolution plan. This meant that JSW was under obligation to comply with its own resolution plan in a time-bound manner.
Those who opposed the NCLAT decision told the SC that the appellate tribunal modified those conditions in the NCLT judgment that were not suitable to JSW. According to them, JSW’s appeal was not legally maintainable.
Non-compliance of mandatory provisions of IBC
Holding JSW responsible for the indefinite delay in completing the resolution process, the bench pointed out a collusion between the company, the CoC, and the IRP to cover up gross violations of the law and its regulations.
The court noted that payments which were to be made to the creditors within 30 days of the NCLT passing the order approving the resolution plan, remained unpaid until March 2022. To justify non-adherence to the timeline, JSW argued payments got delayed due to pending appeals, first before the NCLAT and then before the SC.
“The net result is that the upfront payments as agreed to be made in the Resolution Plan within thirty days of the approval of the plan by NCLT was delayed by 540 days in respect of payment to the Financial Creditors and by 900 days in respect of payment to the Operational Creditors,” the bench said, adding there was no stay on either the NCLT or NCLAT order, preventing JSW from taking steps to complete the resolution process.
The court dismissed the excuse, observing that JSW had misused the process of the court by not making the upfront payments as committed by it for about two-and-a-half years and thereby enriched itself “unjustly.” The company sought to comply with the resolution plan at a very belated stage, after considering the rising prices of steel.
In fact, the bench was of the view that JSW’s move to approach the NCLAT was to delay the implementation of the plan, leaving the “creditors in a lurch and high and dry”.
Though JSW initially infused only Rs 100 crore as share capital towards equity contribution commitments, it did not infuse more funds as was promised by the company in its resolution plan.
However, when the top court was hearing its appeal against the NCLAT order, JSW’s lawyers claimed before it that the company’s board had approved the issuance of compulsory convertible debentures of one of its companies that was to be merged into BPSL having a value of Rs 8,450 crore.
But when they were told to place some material or affidavit on record to show if the same was fulfilled, the lawyers of the company failed to do so.
According to the IBC, if the successful resolution applicant wants more time to fulfil its obligations set out in the resolution plan, it has to seek appropriate permission to do so. However, in the present case, no material was shown to the court to establish that the effective date as contemplated in the resolution plan was extended either on the orders of the NCLT or NCLAT.
Taking all of this into account, the bench observed: “When the SRA-JSW, CoC and Resolution Professional are being represented by very eminent Advocates, non-production of such relevant material with regard to infusion of Equity and extension of Effective date, to substantiate their submissions, cannot be without any purpose. It therefore raises serious doubts about the legality of such actions and genuineness of the so-called compliance of Resolution Plan, pending these appeals.”
It said the court cannot approve the extension of the effective date that may have been given surreptitiously by some lenders, claiming to be part of the CoC.
JSW’s attempt to comply with the resolution plan while its appeal was pending in the SC was seen as a “smart” move by the court, which, it said, was done to realise the beneficial market trend of steel.
Another violation noticed by the court was that JSW had contravened the IBC’s requirement to conclude the resolution process within 180 days, which may be extended further by another 90 days, subject to bringing it to the NCLT’s notice. Moreover, the resolution professional should have, as per the law, brought to the CoC’s notice the expiry of 180 days and sought appropriate instructions in this regard. But the same was not done.
Was JSW “related party” to BPSL?
The SC was also “stunned” by the NCLAT’s opinion to ignore a crucial revelation made by the ED during its PMLA probe against BPSL. The anti-money laundering investigations disclosed that JSW had entered into a joint venture agreement with BPSL and one more company Jai Balaji pursuant to a government order in March 2008.
However, in its resolution plan, JSW had suppressed this material fact, which the NCLAT in its judgment had justified. The NCLAT touched upon the issue when it was argued whether JSW, on the basis of the ED’s discovery, was a related party to BPSL.
Though the top court did not determine the “related party” issue, since it was not pressed by those who had challenged the NCLAT’s appeal favouring JSW, it did highlight that non-disclosure of JSW’s joint venture with BPSL was a breach of a statutory requirement under the law.
The bench also observed that JSW had not filed an affidavit, confirming its eligibility under the law, with the resolution plan. And the same was not pointed out by the resolution professional, who without ensuring the presence of such an affidavit went ahead to file the company petition with the NCLT to seek its approval for JSW’s resolution plan.
Violations by RP/COC
The SC judgment strongly criticised the resolution professional as well as the CoC for the gross violations they had committed.
The bench noted that as per the regulations under the IBC, the IRP is required to submit the CoC-approved plan to the NCLT within 15 days before the maximum period for completion of the resolution process, which is 270 days. In this case, the plan was placed before the NCLT four months after the CoC had given a go-ahead to it.
The IRP, the SC said, had also failed to confirm that JSW met the legal requirements, particularly with regard to non-contravention of any provision of law and with regard to the payment of debts to the Operational Creditors in priority. As per the law existing then, the amount due to the operational creditors under the resolution plan had to be given priority in payment over the financial creditors.
Financial creditors are those who have a purely financial contract with a company, such as a loan or debt security, while operational creditors are those who are owed by a company for goods or services they provided.
However, this mandatory requirement was not complied with in this case, and due to this, financial creditors were given priority. Despite such “gross non-compliance” with the mandatory provisions of the IBC and its regulations, the IRP placed JSW’s Resolution Plan before the CoC.
Just as the Resolution Professional had failed to examine and confirm compliance with the mandatory provisions of the Code to protect the interests of all stakeholders involved in the process, the CoC also failed to discharge its duty to carefully examine the feasibility and viability of the plan, the court held.
The CoC also, without verifying the mandatory requirements of the regulations, particularly concerning the feasibility and viability of the plan, the effective implementation of the plan, and the capability of the resolution applicant to implement it, permitted JSW to submit the consolidated resolution plan.
The changing stance of the CoC before the SC, the court said, “smacked of its bona fides and raises serious doubts about the exercise of its so-called commercial wisdom.”
In the SC, even after making serious allegations against JSW of misusing the process of law and failing to implement the Resolution Plan in a time-bound manner, the CoC accepted the amount of Rs 19,350 crore, two years after the NCLT had approved the plan, and later supported the company.
‘NCLAT could not have set aside PMLA proceedings’
The NCLAT, the SC said, also erred by opining that the ED did not have the power to attach BPSL’s assets while the insolvency process was ongoing and the matter was pending in the NCLT. This observation was made without any authority of law and lacked jurisdiction.
The SC said that neither the NCLT nor the NCLAT is vested with the powers of judicial review over decisions taken by the government or a statutory authority in relation to public law. The scope of the two bodies is limited to the IBC, and any decision taken in the realm of public law cannot be treated as arising out of or in relation to the insolvency resolution process, it clarified.
JSW, the bench ruled, could not have challenged the attachment orders in its appeal before the NCLAT. It was also under challenge before the top court in an appeal filed by the CoC. Despite the matter being pending in the SC, the NCLAT proceeded to give a finding on it, which, the top court ruled, clearly contradicted the law.
JSW, the SC said, first secured the highest score by misrepresenting itself before the CoC, and then instituted “vexatious and frivolous litigation in the NCLT and NCLAT,” delaying the “implementation of the resolution plan under the garb of pendency of proceedings.” This, it ruled, clearly proved the mala fide and dishonest intention on its part not to implement an unconditional plan.
(Edited by Radifah Kabir)
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Does the court want IBC mechanism to fail? This issue could have easily tackled by applying fines on JSW…eith the interest on delayed payments or difference in steel prices per tonne. Wonder is something else was the motive here.